Retirement is a life event that most everyone looks forward to for much of their working careers. However, these years need to be funded with sufficient income, and properly planning for where to allocate these investments will significantly impact how money becomes available in retirement.
Multi-year guaranteed annuities are beneficial for those struggling with uncertainty in retirement planning because they are predictable and facilitate growth.
Here is what you should know about the many advantages that MYGAs offer when planning for income in retirement.
How MYGAs Make Retirement Planning Easier
Multi-year guaranteed annuities, or MYGAs, can simplify retirement planning by creating a predictable growth opportunity for investors. They also provide other advantages, from how taxes are calculated to the lack of an income or investment ceiling, unlike other products. The most substantial benefits of multi-year guaranteed annuities include:
Guaranteed Growth
The “guaranteed” element of a multi-year guaranteed annuity refers to the rate at which the money accumulates. A MYGA is funded with a one time lump sum, after which the investment grows at the rate set by the contract.
Unlike many other types of investments, such as brokerage accounts that track the stock market, MYGAs guarantee a specific rate for the entire duration of the product’s term. This means that even when the market goes down, a MYGA will accumulate at the same rate as before.
While this does eliminate the possibility that a MYGA will grow more when markets are up, this predictability is vital when planning retirement income. As people get closer to retirement, it becomes increasingly risky to leverage unpredictable assets.
Because it offers clear future information, it is possible to calculate exactly how much a MYGA will be worth in three, five or even ten years depending on the term and rate. This enables investors to know with certainty how much money they will have access from this retirement option.
Tax Deferral
MYGAs are a tax-advantaged vehicle which means that the investor will not owe taxes on any accumulated value (gains) within the MYGA for the duration of its growth. Only when the money is collected as income is the accumulation taxed.
This enables the full amount, including previous accumulation, to grow at a faster rate. Other products such as certificates of deposit (CDs) will be taxed annually, reducing the power of capitalization and growth.
Exactly how a MYGA is taxed will depend on how it was funded and how the money was received. MYGAs funded with pre-tax money will be fully taxed as income when the balance is received. Those funded using after-tax dollars will only require taxation of the accumulated portion.
When a MYGA matures, it can be received as a lump sum, rolled into another MYGA or used to begin a fixed annuity, each with their own taxation differences.
Partial Withdrawal Potential
While the terms of each contract vary, many MYGAs allow for partial withdrawals without penalty. Often, this provision permits up to 10% of the account value to be removed each year. Compared to CDs and other products, which impose a fee if money is withdrawn before maturation, MYGAs can afford slightly more flexibility.
When planning for retirement income, having this additional potential revenue stream can be a valuable backup plan. MYGAs do not provide income similarly to other annuities, instead focusing on growing the money. For those concerned about locking their income into this agreement for the entire term, a withdrawal provision may ease that concern. Be sure to confirm this with your provider.
No Investment or Product Limits
One of the most favored advantages of a MYGA is that it is not restricted by investment or account limits. In other words, a buyer can have as many MYGAs as they choose, and those MYGAs do not have a cap on the amount that can be contributed.
Compare this to common investment options including Roth IRAs, which will only accept around $6,000 per year (depending on age and income). MYGAs will not phase out eligible investors based on age, employment status, marital status or income as other products will.
Choose the Right MYGA for Your Situation
Retirement income planning is an important part of creating a full financial picture, but it does not have to be complicated. Investors know what is best for their unique situations, which is why Pillar Life Insurance offers annuities including MYGAs and SPIAs via its self-service portal, without the need to speak to an agent.
Take the online questionnaire to learn more about the products Pillar offers and to begin the process of securing the annuity that is right for your goals.
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